This article was written exclusively for Investing.com
- Warren Buffett’s partner Charlie Munger loads up on BABA
- China’s collective wealth initiative put a sock in the founder’s mouth
- Investors have shunned Chinese stocks
- Value seekers now nibbling on China shares as US stock market is expensive
- Risks remain high as China has been aggressive
The path of least resistance for the US stock market has been a pattern of higher lows and higher highs since the pandemic-inspired correction during February and March 2020. Indeed, over recent months, all of the leading US stock market indices have reached new all-time highs.
One powerful force pushing equities higher: TINA, the feeling there is no alternative to stocks for investors. Historically low interest rates, rising corporate profits, and a bullish trend have encouraged investors to keep buying shares. Tax-deferred accounts continue to create natural buying in the equity arena.
With US stocks at record highs, it's more than a challenge to identify value. Fundamental value-seeking investors are faced with stock prices that require considerable earnings growth to maintain their upward trajectory.
Meanwhile, Chinese stocks have not tracked US shares. While the SPDR® S&P 500 ETF (NYSE:SPY) was over 25% higher in 2021, as of Nov. 8, the exchange traded fund reflecting the fifty leading Chinese stocks that trade on US exchanges, the iShares China Large-Cap ETF (NYSE:FXI), was approximately 14.7% lower.
Alibaba Group Holdings (NYSE:BABA), the China-based internet retail giant, is one of the leading stocks in the FXI portfolio. BABA shares had declined by more than 30% since the end of 2020 as of Nov. 8. Some investors believe that BABA is a company that offers compelling value in the current environment.
Warren Buffett’s partner Charlie Munger loads up on BABA
At ninety-seven years old, Charlie Munger, Vice Chairman of Berkshire Hathaway (NYSE:BRKa), as well as CEO Warren Buffett’s sidekick, is still going strong. In early October, the value investor made an interesting choice when he decided to double down on his firm’s investment in Alibaba, one of China’s most closely followed stocks.
In a regulatory filing, Munger’s newspaper publishing company and investment firm Daily Journal revealed it boosted its long position in BABA by over 80% during the third quarter of 2021, to more than 302,000 shares. Which is particularly interesting given the stock's performance in 2021 has been nothing short of awful.
Source, all charts: Barchart
The chart shows BABA shares finished 2020 at $232.73 and were trading below the $161 level on Nov. 8. The stock reached a new low for 2021 of $139.63 on Oct. 4 when news of Munger’s buying hit the market. The shares rallied to a high of $182.09 on Oct. 20 but ran out of upside steam after the market digested the Munger purchase.
Yet Charlie Munger sees value in BABA and other Chinese shares.
China’s collective wealth initiative put a sock in the founder’s mouth
Munger is never shy about sharing his opinions, even when they're highly controversial. Over the past year, the Chinese government cracked down on financial superstar Jack Ma, Alibaba Group's co-founder, to minimize individual wealth over the “collective wealth” sought by President Xi.
China has room for only one superstar, President Xi, who has consolidated his power and control over the country’s 1.4 billion citizens.
Charlie Munger said, “Communists did the right thing.” While he did not advocate for "all of the Chinese system” in the US, he “certainly would like to have the financial part of it in my own country.” His buying of BABA caused a sudden recovery in many of the leading Chinese stocks that had been under pressure over the past year.
Investors have shunned Chinese stocks
The FXI ETF holds a portfolio of the leading Chinese companies that trade on the US stock market, including BABA. After falling to a low in tandem with markets across all asset classes in March 2020, Chinese stocks recovered.
The chart highlights the move from $33.10 on Mar. 19, 2020, to a high of $54.52 on Feb. 17, 2020. While US stocks continued to rally, making new highs from February through early November 2021, the FXI ETF ran out of upside steam and was back below the $40 level on Nov. 8. FXI is now closer to the March 2020 low than the February 2021 high.
President Xi’s “collective wealth,” tensions with the US and Europe, and a slowdown in China’s economy have weighed on Chinese stocks.
Value seekers now nibbling on China shares as US stock market is expensive
It is more than challenging to find value when it comes to the US stock market.
The chart of the S&P 500 index shows the rise from a low of 2,191.86 on Mar. 23, 2020, to the 4,700 level on Nov. 8. The index has reached many, new all-time highs in 2021.
Meanwhile, the all-time high in Chinese stocks remains elusive.
The long-term chart shows that FXI reached its record high in 2007 at $73.19 per share. At below $40, value investors like Charlie Munger believe the potential rewards justify the political risks of investing in Chinese companies these days.
Risks remain high as China has been aggressive
Risk is always a function of potential rewards in any market. There can be no doubt that while Munger is doubling down on his BABA investment, the Chinese government is doubling down on its aggressive stance towards the US and Europe.
Tensions surrounding Taiwan and expansion in the South China sea are issues on the geopolitical landscape. “Collective” versus individual accomplishments is an ideology that separates the Chinese system from the “free” world.
Still, Charlie Munger and a growing number of investors are looking east towards China since shares of the leading Sino companies offer compelling value versus US stocks.